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THE PANIC AND 
E PRESENT DEPRESSION 



ADDRESS DELIVERED BEFORE 



THE AMERICAN ACADEMY OF POUTICAL AND SOCIAL 
SCIENCE 



Philadelphia, April 10, 1908 



THEODORE MARBURG, M. A. 



(Reprinted from the Proceedings of the Academy) 



Two things conjointly cause gold to be drawn to a country ; one is the providing 
of a place for gold in the cunency system of the country, the other is the interest 
rate. . . There must be a need for gold ( i. e., a gold standard and 

an absrace of other forms <A money), accompanying the high interest rate, other- 
wife gold will not Come.— Page 15. 



THE PANIC AND 
THE PRESENT DEPRESSION 

ADDRESS DELIVERED BEFORE 

THE AMERICAN ACADEMY OF POLITICAL AND SOCIAL 
SCIENCE 

Philadelphia, April 10, 1908 

BY 

THEODORE MARBURG, M. A. 

(Reprinted from the Proceedings of the Academy) 



Two things conjointly cause gold to be drawn to a counlTy ; one 15 the providing 
of a place for gold in the currency system of the country, the other is the interest 
rate. . . . There must be a need for gold (i. e., a gold standard and 
an absence of other forms of money), accompanying the high interest rate, other- 
wise gold will not come. — Page 1 5. 






23JI '08 



THE PANIC AND THE PRESENT 
DEPRESSION 

To accept too freely the theory of periodicity of 
panics is apt to make us fatalists and careless of 
our methods and laws. It is safer and more help- 
ful to assume that each recurring panic has its 
own special causes and then to endeavor to ascer- 
tain these causes. Each panic teaches us some- 
thing new and this accumulating experience 
should in time enable us to prolong the interval of 
recurrence if not eventually to prevent the recur- 
rence entirely, just as epidemics of disease, for- 
merly thought inevitable, are now prevented. 

In connection with the panic of 1907 it is diffi- 
cult to discover any widespread speculation or 
overproduction. 

An examination of stock exchange lists shows 
that the highest quotation for many leading rail- 



road stocks, such as the Pennsylvania, Louisville 
and Nashville, Northern Pacific, Chicago and 
Northwestern, Denver and Rio Grande, Missouri 
Pacific, New York Central, New York New 
Haven and Hartford, and Texas and Pacific, were 
recorded in 1901-2. From that time down to the 
panic of 1907 — a period of five years — there oc- 
curred a considerable shrinkage of market value 
in the face of increasing earnings. 

Overproduction we find in a few commodities, 
such as copper and lumber, but the list of such 
commodities is short. 

Another recognized cause of panics is large in- 
vestments in securities which are not immediately 
productive, such as was the building of the trans- 
continental railways at a time when there was lit- 
tle business for them. Have we witnessed any 
such phenomenon in connection with the recent 
panic? The incorporation of private industries 
and the listing of their securities on the exchange 
effect not a transformation of circulating capital 
into fixed capital, but rather a transfer (when 
the securities are marketed) of capital from the 



hands of one set of men to another. Increase of 
railroad trackage and cars, and improvement of 
terminal facilities, cannot be put in the category- 
referred to, because, until the panic came on, the 
business was waiting and these improvements 
were immediately productive. The calamitous fire 
and earthquake losses of the past few years, com- 
ing as they did when labor was fully employed, 
must of course be regarded as diminishing pro- 
ductive capital. For the time being we must 
likewise so regard the Panama Canal and the un- 
completed tunnels entering New York. But where 
capital is concerned the recuperative process is 
quite rapid; not all the happenings referred to 
came together and, moreover, they acted upon, all 
told, such a small proportion of our vast working 
capital that they could have had but little effect 
in the direction indicated. 

To explain the panic of 1907 we are forced, 
then, to look for causes other than the usual 
causes of panics. 

One of them we find in the strain placed by 
legitimate business enterprise upon the world's 



money supply, a strain due largely to the great 
opportunities of our day. For this difficulty there 
is no visible remedy. To endeavor to find a sub- 
stitute for money in something not limited by 
nature is to court trouble. 

But the panic was largely centered in our own 
country and its origin must be sought principally 
in local conditions. 

Turning to them, there immediately appears as 
chief among them the attitude of the federal and 
state governments toward a most important in- 
dustry, namely the railroads. It is probable that 
the attack on the railroads was the most impor- 
tant single factor in producing a state of mind 
which made possible the panic of 1907. Unques- 
tionably grave abuses existed, but these abuses 
may be classed largely under the head of conduct 
and were unconnected with the question of rea- 
sonable rates. The people were suffering from 
inadequate facilities ' more than from high 
charges. They were suffering from discrimina- 
tion, which favored particular interests. The 
interest of the public lay distinctly in the direction 

6 



of permitting the railroads to continue prosper- 
ous and then forcing them by law to make use of 
their profits to improve the service. In proceeding 
to attack railroad earnings v^e have simply post- 
poned the day of needed improvements, for the 
double reason that when earnings are inadequate 
the railroads can neither make improvements out 
of surplus earnings nor command sufficient confi- 
dence in their future prospects to enable them to 
borrow. If this reasoning be -correct, it follows 
that one of the effective steps to recovery is to 
change the public attitude toward railroads, to 
let them earn money and force them to make the 
proper use of that money. 

The next step in bowling over the investor and 
with him the laborer and the public generally was 
the extravagant fine on a single industrial trust. 
A fine such as that imposed on the Standard Oil 
Company is out of keeping with the spirit of 
modern law, which is remedial, seeking cure and 
prevention, and subordinating the idea of retribu- 
tion and revenge. The heads of these big corpo- 
rations have frequently been termed knaves ; they 



have seldom been charged with being fools. A 
fine, the mere fraction of that actually imposed, 
together with an indication of what the maximum 
fine might have been on all the counts, would 
have demonstrated effectively to its managers the 
power of the government to ruin the Standard 
Oil Company if it failed to obey the law, and the 
desired end would have been attained without 
such disastrous consequences to the stockholder 
and the public. 

The remedy for the abuses of industrial trusts 
probably lies in the direction of federal control, 
control through license. The moment corpora- 
tions are required to register under a federal stat- 
ute the government may require certain informa- 
tion of them and the possibility of great reforms 
at once appears. When attended by publicity, 
compulsory investigation into illegal and unjust 
practices tends to correct not only the illegal prac- 
tices but the unjust practices as well and that 
without resort to proceedings in a court of law or 
even in a court of arbitration. Possibly nothing 
but the knowledge that these corporations can be 



controlled by the federal government and are 
being controlled by it will stop the popular attacks 
on them. 

What applies to the industrial trusts in this 
connection applies equally to the railroads, al- 
though here the federal government might possi- 
bly go a step further and resort to actual incor- 
poration of interstate railroads under federal law 
as distinguished from the mere Hcensing of in- 
dustrial trusts. It may find it wise and even 
necessary to do more than control the practices of 
the railroads, to interfere, in fact, with their 
actual operation by insisting on improvement of 
the service. If the government assumes such a 
position, of course railroad earnings must not be 
interfered with. 

The recent decision of the Supreme Court de- 
claring Minnesota and North Carolina rate laws 
unconstitutional because confiscatory is cold com- 
fort for the reason that if the state and federal 
governments are to be allowed to proceed against 
the railroads to the point of confiscation it leaves 
but little for the investor to look forward to. 



At the Chicago Trust Conference in October 
last I had occasion to deal with this subject as fol- 
lows: 

"Let our legislators see that where there is a 
single track today a double track be laid, that 
existing double tracks grow to four, that grade 
crossings be aboHshed, cars multiplied, terminal 
facilities increased, that the penalty of men's 
stupidity in living in such numbers under the 
insufferable conditions that prevail in our great 
cities be somewhat lessened by compelling the 
railroads to suppress smoke in passing through 
the cities, and, above all, that the hours of the 
employes be not too long, so that they may give 
efficient service and stop the sacrifice of life on 
railways. To compel the railways to do these 
things is to compel them to benefit themselves and 
involves no injustice to the stockholder. I do not 
think we realize yet how serious this step of the 
Federal and State governments is. The great 
fall in the value of railway shares in England dur- 
ing the past ten years* is traceable directly to 
the power to fix rates placed in the hands of 
the Board of Trade, a conservative body of prac- 



* See table, p. 14. 

10 



tical men in one of the most conservative coun- 
tries in the world — conservative in the best sense. 
The EngHsh railroads now find themselves con- 
fronted with the necessity of making extensive 
improvements, including the relaying of track, 
with no visible resources for the undertaking. 

* M: * The consequences of discouraging 
railroad improvements must be more serious in 
America than it has been in England, for the 
reason that England had her mileage and ade- 
quate trackage built when this practice of attack- 
ing earnings began. 

"During the past year the most serious attack 
on railways came from the separate States, but 
it is the new powers conferred on the Interstate 
Commerce Commission from which we really 
have most to fear. The cry of the public is 
always for lower charges. Let this cry come up 
from all parts of the country to this small body 
of men through a series of years and what hope 
is there that they will succeed in withstanding it ? 
The separate States are likewise setting up com- 
missions with power to fix charges of public 
service corporations, paralleling the action of 
certain cities in substituting government by com- 

II 



mission for the representative system. * * * 
"Our present tendency to cast about for new 
devices in government instead of centering our 
attention upon the betterment of the personnel 
under existing institutions is regrettable. To 
deprive ourselves of the advantages of the delib- 
erative assembly, whether in cities under the 
Galveston plan, which is spreading, or under 
government by commission in important fields of 
State or national jurisdiction, is to ignore the 
teachings of history. The united thinking of the 
many, when opinion is informed, is superior to 
that of individuals. The people as a whole, after 
a campaign — newspaper or political — are sounder 
than the legislative assembly, and in the long run 
the assembly after discussion is sounder than a 
commission. On the majority of subjects which 
call for legislation there can be no campaign of 
education because the subjects are too numerous 
and the needed action too urgent; therefore the 
system of representation, which is one of the 
greatest political institutions men ever devised. 
Must we recall anew the reflection, so often made 
before, that benevolent despotism has its advan- 
tages, but who can promise that the despotism 



once established shall continue benevolent? The 
governing commission, it is said, is amenable to 
public opinion and removable at the will of the 
people. But that is to make it everybody's busi- 
ness to v^atch and control it, and proverbially 
what is everybody's business is nobody's business. 
There is a growing power of the people to choose 
between contending leaders and conflicting ideas. 
That choice is best expressed in the long run 
through the instrumentality of the deliberative 
assembly, and to fly now in the direction of 
direct democracy (the referendum), now to its 
opposite, autocracy, is the play of the child with 
a ball and rubber string — the rebound is inevita- 
ble. The most useful powers to confer on a 
commission are powers such as the Federal 
Bureau of Corporations enjoys — powers of in- 
vestigation, including the power to summon wit- 
nesses. If the facts of an abuse are laid bare, 
public opinion is apt to impose a remedy — if not 
by its own sheer force, then by means of the 
legislative assembly. Perhaps we can afford the 
experiment of allowing commissions to regulate 
the conduct of corporations. My plea is that for 
the present they be not authorized, either in State 
or nation, to fix prices." 

13 





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14 



Another potent cause of the panic, a cause 
which has been generally recognized, is the in- 
elasticity of our currency. This subject has been 
dealt with quite fully before this body and else- 
where during the past few months, and what I 
have to say today is simply by way of supplement- 
ing that discussion. 

The problem of an emergency currency re- 
volves principally around the question of what con- 
stitutes an adequate tax on such currency. With- 
out an adequate tax the currency will not contract 
sufficiently in normal times and will, therefore, 
lack proper elasticity in abnormal times. Further- 
more, without such tax there is serious danger 
that inferior money will take the place of good 
money. Two things conjointly cause gold to be 
drawn to a country; one is the providing of a 
place for gold in the currency system of the coun- 
try, the other is the interest rate. Neither the 
one nor the other alone suffice. High rates of 
interest have obtained in silver countries without 
drawing gold to them; high rates of interest 
obtained in the United States before our resump- 

T5 



tion of specie payments, without sufficiently at- 
tracting gold. There must be a need for gold (i. e. 
a gold standard and an absence of other forms of 
money), accompanying the high interest rate, 
otherwise gold will not come. Obviously the way 
to maintain "an absence of other forms of money" 
is to tax such money. If we want to prevent an 
issue of paper money which, if issued, would in- 
terfere with the supply of gold, we must begin 
the tax on such money at a rate which is supposed 
to attract gold so that the general rate of interest 
may not be interfered with beyond that point. 
For example, if the United States, which is on a 
gold basis, finds that a general interest rate of 
6% will attract gold, it can avoid having its gold 
supply affected by an emergency currency if the 
tax it imposes upon such currency begin at 6%. 
A currency taxed at 6% will not be issued until 
the general rate of interest is high, i. e. until gold 
is being attracted; and it will not interfere with 
the continued inflow of gold because the moment 
the interest rate falls too low, emergency cur- 
rency so taxed will become unprofitable and will 

i6 



be withdrawn. On the other hand, currency is- 
sued at a low tax is apt to keep the general inter- 
est rate too low and prevent the inflow of gold. 
The advocates of asset currency in this country 
refuse to consent to the imposition of a high tax 
which alone will make it a purely emergency cur- 
rency. An asset currency so taxed is not their 
kind of asset currency. 

The question of the basis of the currency issues, 
whether bank assets or miscellaneous securities 
deposited with the government, is of minor im- 
portance as compared with the question of an 
adequate tax on the issues. Still, because of the 
number of banks in the United States to be sur- 
veilled, it seems preferable that the government 
should have in its own hands something to secure 
the issues. Coming to the question of the charac- 
ter of the securities to be so desposited, we find 
objection made to the inclusion of railroad bonds 
on the ground that the market value of railroad 
bonds would be unduly enhanced thereby. Is this 
objection well taken? A high market price for 
their bonds means borrowing at a low rate of in- 

17 



terest, or lighter fixed charges on the railroads. 
Now, whether it be the public purpose to further 
cheapen the service or to let the railroads earn a 
profit and insist upon their using it to better the 
service, a lessening of the burden of fixed 
charges conduces equally to either end. So that 
from whatever standpoint we look at it, the in- 
clusion of railroad bonds in the securities to be 
deposited for emergency currency issues would 
be a pubHc gain. 

The crisis of 1907 was aggravated, as we know, 
by a run on the banks. Two devices suggest 
themselves as calculated to prevent a recurrence 
of this; one, postal savings banks, the advan- 
tages of which must be apparent to every student 
of public questions, the other a guarantee by the 
federal government of deposits in national banks. 
It would be a distinct gain if, while having a 
secure currency, we could at the same time make 
secure the deposits in national -banks. This guar- 
antee could be made without risk of financial loss 
to the government if a small tax were imposed 
on the banks, the proceeds of which would con- 

18 



stitute a guarantee fund, the government being 
empowered to levy an extra assessment on all the 
national banks in addition to the regular tax 
whenever the guarantee fund fell below a speci- 
fied amount fixed by the statute. The contention 
that the government would assume an impossible 
obligation under such a guarantee is met by the 
provision that the government guarantee be lim- 
ited to the actual fund collected as under the 
Canadian provision for the redemption of the 
notes of failed banks. Is such a guarantee likely 
to undermine to any great extent the conservative 
managerrient of the banks? Certainly it would 
not relieve the stockholder from responsibility. 
Before the government guarantee would apply 
and the government fund be touched, the stock- 
holder would be called upon to make good his 
extra liability of $ioo on every share of stock 
when the assets were inadequate. 

It may be urged that the power to withdraw 
deposits and make the bank unprofitable, or ac- 
tually to threaten its stability, is an instrument 
the effect of which is immediate, that, therefore. 



19 



the depositor in practice exercises a much more 
effective control over the directors than the stock- 
holder, whose knowledge of the affairs of the 
bank is notoriously inadequate and whose control 
of the bank's policy is correspondingly feeble; 
that the consciousness of this fact acts as a check 
upon the bank's officers; that if deposits were 
guaranteed the depositor would no longer scru- 
tinize the management of the bank, the result 
being looser management and more failures and 
greater losses to be made good by a government 
guarantee. To what extent the watchfulness of 
the depositor makes for conservatism in banking 
is problematical. Let us assume that all of these 
contentions are well founded and that at first 
losses through bank failures would be doubled 
under this plan. On whom do these losses fall? 
Not: on the depositor, for his deposit is secure 
under the government guarantee — and the de- 
positor is the public. It falls, first, on the stock- 
holder, who, if bank methods become lax, will 
soon devise means of keeping better control of 
the management. It falls, next, on the associated 



banks, whose interest it immediately becomes to 
insist on more efficient government supervision. 
Furthermore, one source of bank failures — the 
run on banks — is removed. With these factors 
to offset the greater laxness of bank manage- 
ment, which we will assume results from the with- 
drawal of watchfulness on the part of depositors, 
it is reasonable to suppose that in the course of a 
few years the losses through failure of banks 
would not be greatly in excess of the present 
average. But even if these losses were doubled 
a very small tax would still suffice to cover them. 

In the extreme case of losses threatening to 
become excessive, resort could always be had 
to a repeal of the statute and^ after reasonable 
notice, an abandonment of the government guar- 
antee without jeopardy to existing interests. In 
other words, the proposed legislation involves no 
such dangers as lax currency legislation. 

Ease of mind of the depositor, actual security 
from loss on the part of many who can ill afford 
a loss, a broadening of the practice of instrusting 
money to banks, instead of hoarding, the entire 

21 



removal of the incentive to withdraw deposits for 
hoarding and consequent doing away with runs 
on banks ; these are the advantages that could be 
confidently expected. 

In a discussion of the business depression and 
possible remedies the question of wages forces 
itself upon us. It is urged that the laborer should 
accept lower wages to help along recovery. In 
many cases he is forced to accept lower wages 
whether logic is with him or not. In times of 
business depression his strategic position is par- 
ticularly weak and his appeal must be principally 
an appeal to reason. Now, from the standpoint 
of the public interest, to what extent does a re- 
duction of wages really conduce to recovery, and 
even though it may so operate, is the public 
welfare promoted in the long run by such reduc- 
tion? If the standard of living be lowered by 
lower wages — and how can it be otherwise — 
lowering of wages is to be avoided, if possible. 
It is the standard of living which makes not only 
the market, but the man, i. e. makes him a more 
valuable citizen and more efficient workman. If 



wages are the last thing to recover with a recov- 
ery of business activity and the last thing to 
advance amid advancing prices, then wages are 
entitled to especial consideration and protec- 
tion. Undoubtedly lowering wages helps to 
lower prices, but in times of depression the 
extent to which lower prices enlarge the mar- 
ket is problematical. If it be a question of 
foreign competition, e. g. if lower wages abroad 
are forcing the manufacturer out of his prin- 
cipal field of operation, the case for lower wages 
at home is plain. But when a people are sur- 
rounded by a tariff wall, it is safe to say that in 
the long run wages are recovered by the em- 
ployer in prices, just as taxes in the long run are 
recovered in prices. 

And underlying the whole problem is the ques- 
tion of social justice. Has the laborer since the 
beginning of the industrial era gotten out of his 
labor as decent a living as the ingenious labor- 
saving machinery of modern times should give 
to him? And is it not fairer that capital and 
direction should suffer the pinch of hard times 
before they ask labor to share it ? 
23 



